accounting essay

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This Project represents the findings of a case study in how to apply Environmental Management Accounting (EMA) to achieve financial and Environmental benefits. STAR Engineering Works manufactures plastic bottles and caps for the food, health and cosmetic industries. The Project study focused on several key areas of the business:

The manufacturing business ;

2. Key manufacturing process; and

3. An individual product.

The economic and environmental impacts of the management decisions which flowed from

those changes were recorded during a trial.STAR Engg.Works relates costs to waste, energy and

packaging. And it tries to bring the same to business.

At the process level

An analysis was performed of two mutually exclusive methods of performing

a key manufacturing process. The analysis identified significant and

unexpected waste costs, and differences between the two processes in

economic and environmental performance. This demonstrated the application

of EMA at the process level, improving decision-making and integrating

environmental performance considerations.

At the product level

The application of EMA at a product level showed that costs of waste are not

currently being accounted for in determining standard costs. Incorporating

the environmental costs at this level has implications for pricing, production

repair that can occur at companies and affect governments or people . This book

only deals with corporate environmental costs. External costs which result from corporate

activities but are not internalized via regulations and prices are not considered. It is the role of governments to apply political instruments such as eco-taxes and emission control regulations in order to enforce the "polluter-pays" principle and thus to integrate external costs into

Environmental protection costs

(Emission treatment and pollution prevention)

+ Costs of wasted material

+ Costs of wasted capital and labour

= Total corporate environmental costs

1 to 10 per cent of total environmental costs, while the purchase costs of the wasted materials represent 40 to 90 per cent of environmental costs depending on the business sector examined.

waste treatment and disposal costs as well as investments in end-of-pipe technologies. Later, corporate material flow balances were determined, but without systematically integrating the two information systems and without assessing the costs of material flows.

Residual waste accounting, in a subsequent phase, not only measures the costs of waste by their disposal costs, but also adds the material purchase values and pro rata production costs. The system boundary is the corporation and identical to financial reporting. This approach is also at the core of the method described in the present report which aims to provide a comprehensive statement of annual environmental costs.

Activity-based costing improves internal company cost calculation by allocating costs typically found in overhead costs to the polluting activities and products. Significant material flows are traced throughout the company and their costs are allocated back to the polluting cost centres. Flow cost accounting aims not merely to separate the costs of environmental protection but to

detect all material flows via the company's cost centres and to reassess production costs and

percentage amounts added in the various phases of production, like estimated scrap

percentages, waste rates, etc. Technical process flow charts support this approach. While the

method in detail assesses the aggregated amounts and costs of material flows, which results in

a better calculation of production costs, it avoids the need to separate the environment-related

share and to obtain a complete list of other environmental costs. The system boundaries are the

We have used this classification system in this report as it helps explain how

and why different types of costs need to be considered in different ways in a

management accounting framework.

2. STAR Engineering Works

STAR Engg.Works is a plastic injection moulding business

based at VIRAR. They manufacture and assemble a range of polypropylene, polystyrene and polyethylene plastic caps and tops for the cosmetic, food, sports and pharmaceutical industries.

The business has a turnover of approaching 4crore and employees 9

They can recycle waste and operate effective housekeeping the workplace.

The business undertakes two main processes: plastic

injection moulding and assembly.

The materials flow for the manufacturing business unit is shown in figure 1. The waste produced by these two processes is fairly homogenous, consisting of different grades of

polypropylene, polystyrene and polyethylene (as there are little or no additives other than dye). Most of this is collected and ground up and can be re-used as raw material (re-grinding). There are no toxic chemicals used, no hazardous wastes generated.

Figure 1: Materials flow in the manufacturing business unit

Warehouse Plastic raw material Moulding Assembly Warehouse

Dye

Finished

goods

Regrind

Re-usable

waste Add Chart

energy

Waste plastic

(landfill/recycle)

Energy Energy

Imported

Components

Waste

energy

Waste plastic

(landfill/recycle)

Re-used as

raw material

Incentives to use EMA

For the long-term growth of the business.

Savings which could be generated by reducing/re-using waste

3. Implementing EMA

Implementation of environmental management accounting will ultimately

result in changes to the existing management accounts to better show cost

information. This may consist of a few simple changes within the existing

framework or involve a full restructuring of cost centres and account codes.

Making changes to management accounting procedures will incur costs in:

implementing the system changes, educating staff and initial

inefficiencies; and

ollecting additional data and integrating it in the revised management

accounting system.

These costs must be weighed against the anticipated benefits which would be

yielded by more informed decision-making. The benefits may be economic,

improved environmental performance, or both.

Before any changes were made to Cormack's management accounts, it was

necessary to understand:

the existing management accounting systems and procedures for the

selected aspect of the business;

the 'significant' environmental aspects of the business; and

the increased revenue and/or reduced cost opportunities that are not

captured by the existing accounting system.

Only then was it possible to assess the estimated costs and benefit of any

changes, and to understand the environmental costs of the business (as

defined) and how they are currently treated within the accounting system.

Management accounting in the manufacturing business unit

An understanding of the management accounting system and procedures was

achieved by interviews with finance staff and analysis of the management

accounts.

The management accounting system is segregated into:

Manufacturing Business Unit (MBU)

Sales and Administration Business Unit (SAU).

Both business units are then combined in the consolidated accounts (CA).

For recording and reporting purposes the MBU (on which this case study is

based) is a cost centre only. The costs in the MBU are absorbed into the CA

COGS account on a standard cost per machine hour basis every month.

Table 1 presents a brief description of the costs recorded in the MBU.

Comparison of the costs of using the hot and cold runner moulding process for a given product, based on machine production for one month

Hot runner

Hot runner

Cold runner

Cold runner

Estimated

Cost(Rs)

Waste Cost(Rs)

Estimated

Cost(Rs)

Waste Cost(Rs)

Materials (in FG)

95868

NA

95868

NA

Energy (in FG)

2899

NA

3049

NA

Materials (in waste)

13221

13221

11508

11508

Labour (in waste)

2216

2216

6216

6216

Energy (in waste)

150

150

132

132

Total

114354

15587

116773

17856

13.6%

15.3%

The different mechanisms of the two processes resulted in varying costs. The additional waste generated by the cold runner process during production resulted in a higher labour waste cost for sorting and processing the waste. For the hot runner, the large amount of unrecyclable waste generated during colour changes and purges, not necessary for a cold runner mechanism, resulted in a higher materials waste costs.

This analysis showed that:

the environmental costs of waste are far higher and more significant, at 13.6% and 15.3%, than management expected the hot runner method is slightly cheaper than the cold runner method,

and has lower environmental costs. However quantification of the environmental impact of each method for the same period shows that other considerations may need to be taken into account in making any decision.

Comparison of the environmental impacts of using the hot and cold runner moulding process for a given product, based on machine production for one month

Hot runner

Cold runner

Waste sent to landfill

500kg

435kg

CO2 emissions from production

12.74 tonnes

13.28 tonnes

A decision to use exclusively hot runners or cold runners has not yet been taken. The financial costs are comparable, but there are differences in the associated environmental impacts. STAR Engg. Works is currently considering several ways to minimise the waste generation of each process.

Product costing and incorporating environmental costs

Product costing and margin analysis drives product pricing, production mix and volume decision-making. However, a review of the current management accounting identified that there is limited product cost information for decision-making. Standard costs have been determined, but are based on management estimations.

A specific product was selected during the trial to help understand: how environmental costs, particularly waste costs, are treated at a product level .The appropriateness of the current standard cost of the product. The product selected was unique at STAR Engg.Works in that it was a simple, one component product produced by one specific machine. This made collation and analysis of the data simple. The machine was also known to generate substantial waste.

Standard direct costs and revised standard direct costs of production for a given product

Current standard cost

Revised standard cost

Materials (in FG)

3870

3870

Labour (in FG)

9530

6000

Moulding energy (in FG)

1470

700

Materials (in waste)

0

1020

Labour (in waste)

0

580

Moulding Energy (in waste)

0

10

Total

49700

47010

Profit margin (including an allocation

of other overheads)

22.55%

23.79%

The analysis showed that:

existing standard costing for this product is imprecise the revised margin was 1.3% higher than the standard used in decisionmaking. Environmental costs account for 0.5% of the profit margin on this product this year alone the waste associated with the manufacture of this

product cost the business $16,100, before disposal costs. The inclusion of environmental costs impacts the profit margin being earned on products and the margin used for decision-making may be inaccurate. Failure to account for environmental costs at the product level raises issues

of cross-subsidisation. For example, the materials waste costs are currently being hidden in the tock variance account (see section 4.5). Stock variance costs are included in the standard cost of products as an element of an overhead allocation (not shown in this analysis). The stock variance element of the standard cost allocated to this product is unlikely to equal $10,200 - it

will probably be less as this product's production is known to generate significant waste. In other words, another product is being allocated a portion of this product's material waste costs.

Cross-subsidisation means that products with few environmental costs subsidise those with poor environmental performance and high environmental costs. The end result is that management may unknowingly.

Cost versus benefit of the re-grinding process

The re-grinding process was identified as worthy of further investigation during the environmental review process (Appendix A). Almost all production waste is re-ground at source for re-use as raw material. No cost information is known about the re-grinding process, but it is assumed to be the most cost-effective means of waste disposal and materials use. From the cost and revenue data generated during the trial it was possible to analyse this "environmental" process to verify the economic and environmental credentials.

Costs and benefits per year

Rs

Depreciation cost

1951

Energy cost

131

Labour cost

3087

Recycling revenue foregone

3175

Raw materials saved

47628

Net benefit per year:

39285

In this case, the economic and environmental benefits of re-grinding moulding waste were obvious to management, although unproven. However, this example is a useful demonstration of how to consider the merits of other Environmental processes.

Energy savings for the air compressor

The energy consumed by air compressors was suspected to be a significant part of the total energy cost of moulding. At the time of the trial, management was in the process of purchasing a new air compressor to cope with increased capacity, but little information was available on energy consumption. An energy-efficient alternative had not been seriously considered as it was perceived to be too costly. Simple analysis of information generated during the trial showed that

investment in the new style energy-efficient air compressors would repay the additional cost over conventional air compressors (the preferred choice) within 5 years. Over the estimated life of 15 years, this would result in an energy saving of $50,000 equivalent to 773 tonnes of CO2.

Attach Chart

Improving the efficiency of lighting

Identification of the lighting cost has provided management with the

information they need to assess a number of energy-saving strategies:

Painting the interior factory walls white

Two of the factories currently have dark red brick interior walls. The third, a

newer factory, has white. All are of similar size and shape. Comparison of

the respective lighting costs during the trial showed how painting the factory

would pay for itself within 9 years, as follows:

Investment in energy-efficient lighting

A lighting consultant is to be engaged to investigate the economic feasibility

of investing in energy-efficient lighting, now that cost data for the existing

lighting is known

Managing the energy overhead

The original energy overhead cost has now been substantially allocated to lighting and moulding. The remainder relates to assembly operations, ancillary machinery and equipment usage around the offices and factory.This will be managed as follows:

â€¢ Cormack has signalled its intention to apply the EMA techniques learnt to the assembly operations. This will identify the energy costs of this process, which may then also be separately accounted for, and subsequently managed for efficiency. Cormack is considering a full co-generation feasibility assessment for the factories to see if waste heat from the moulding process can be recycled to power ancillary machinery, reducing the overhead energy cost. Cormack elieve there may be a case for investment having now identified the heating costs (fuel, aintenance) and the energy costs of the moulding machines â€¢ For more general office and surrounds energy overheads, Cormack has initiated a process of ongoing review to identify general energy efficiency measures. They intend to approach SEDA to discuss the possibility of joining its business energy-smart program.

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